Statement on Shareholder Voting

Today, the Office of the Chairman and the Division of Investment Management suddenly raised questions about long-resolved issues regarding shareholder voting.[1] Because the Investor Advisory Committee’s critical work in this area is ongoing, it’s important to clarify the path ahead for those interested in giving shareholders real access to the levers of corporate democracy.

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First, the law governing investor use of proxy advisors is no different today than it was yesterday. The Commission has long recognized that proxy advisors—the companies that develop recommendations regarding how investors should vote on corporate questions—serve an important role in the shareholder-voting process, and today’s statements do nothing to change that.[2]

Second, there is broad agreement that the Byzantine system that makes it impossible to know whether investors’ votes are being counted must be fixed.[3] Over the last decade, while voting technology has made enormous leaps forward, retail investor participation in corporate elections has declined: today, fewer than one in three investors have their vote counted in those contests.[4] The Commission has known this for years—we issued an impressively thorough concept release on the subject in 2010—and it is time to act.[5] Investors should not have to wait any longer for their votes to be counted in corporate elections.

Third, I am concerned that our efforts to fix corporate democracy will be stymied by misguided and controversial efforts to regulate proxy advisors—the firms that advise American shareholder how to vote in corporate elections. Regulating proxy advisors has long been a top priority for corporate lobbyists, who complain that advisors have too much power.[6] There is, of course, little proof of that proposition, and the empirical work that’s been done in the area makes clear that that claim is vastly overstated.[7] Rigorous review of the evidence shows that lobbyists are observing correlation in advisor recommendations and vote outcomes and confusing it for causation, providing no basis for the policy changes they seek.[8]

More generally, it’s hard to imagine that, upon a survey of all the problems that plague corporate America today, the Commission could conclude that investors receiving too much advice about how to vote their shares—advice they are free to, and often do, disregard—should be at the top of our list. In fact, the lack of competition among proxy-advisory firms is itself reason for pause, as regulation in the area risks further deepening the moat around the existing players—empowering the very firms that, some worry, already have too much influence.

Whatever one thinks of these questions, my plea to my colleagues, and to this Committee, is not to allow corporate lobbyists’ priorities to sidetrack our important work in fixing the American system for corporate voting. We all know too well how entrenched interests in this area can delay needed repairs to the voting system—which is why, in the eight years since the Staff’s exceptional concept release in this area, the system is virtually unchanged.

The Chairman has announced a Roundtable on these subjects later this year. While I remain open to what we might hear from the marketplace, I’m worried that the Roundtable’s consideration of contentious issues like this one will distract from the urgent need to fix the basic mechanics of modern corporate democracy. That’s why I’m so pleased that the IAC is focusing its attention strictly on the voting system and how it can be fixed in a fashion that will make sure every American investor has their vote counted in corporate elections. And I look forward to the IAC’s recommendations regarding how to make our voting system work for ordinary American investors.

[3] Over a decade ago, a widely cited and admired study identified, and urged regulators to engage with, the many problems with the corporate-voting system. Marcel Kahan & Edward B. Rock, The Hanging Chads of Corporate Voting, 96 Geo. L.J. 1227 (2008) (famously asking whether the “basic technology of corporate voting” was “adequate to the task”). Since that time, an astonishingly broad community of market participants have come around to the view that something must be done. Compare David A. Katz, Wachtell, Lipton Rosen & Katz, Proxy Plumbing Fixes are Desperately Needed (August 31, 2010) (describing “[m]ajor reform of the voting infrastructure” as “long overdue” in 2010) with Vito J. Racanelli, Proxy Voting is Broken and Needs to Change, Barron’s (July 6, 2018) (describing the fact that, in 2018, it is “difficult, if not impossible, for a beneficial shareholder . . . to find out if the[ir] vote was cast as instructed and properly counted” in a corporate election).

[4]Compare, e.g., Broadridge & PwC, ProxyPulse: 2017 Proxy Season Review 2 (2017) (pointing out that retail participation in the voting process during the 2017 proxy season was just 29%, while institutional investors participated in more than 91% of the votes put before shareholders during that period), with Securities and Exchange Commission, Concept Release on the U.S. Proxy System, Release Nos. 34-62495; IA-3052; IC-29340, File No. S7-14-10, at 33.

[5] Securities and Exchange Commission, Concept Release on the U.S. Proxy System, Release Nos. 34-62495; IA-3052; IC-29340, File No. S7-14-10, at 9, available at https://www.sec.gov/rules/concept/2010/34-62495.pdf (describing concerns, nearly a decade ago, about “the accuracy, reliability, transparency, accountability, and integrity of” the shareholder voting system in the United States).

[6]See, e.g., Statement of the U.S. Chamber of Commerce on the Market Power and Impact of Proxy Advisory Firms (June 5, 2013) (“For a number of years, the Chamber has expressed its long-standing concerns with . . . proxy advisory firms”), available at https://www.centerforcapitalmarkets.com/wp-content/uploads/2010/04/2013-6.3-Pitt-Testimony-FINAL.pdf. As usual, these arguments arrive at the SEC’s doorstep with little evidence but lots of exhortation. See, e.g., id. at 8 (stating, in block bold text, that “ISS and Glass Lewis have become the de facto standard setters for corporate governance policies in the U.S.”; oh, if only font choices could make things I believe, but do not know, more true).

[7] The seminal work, not cited anywhere in today’s statements or the Chamber’s lobbying, is Stephen J. Choi, Jill E. Fisch and Marcel Kahan, The Power of Proxy Advisors: Myth or Reality?, 59 Emory L.J. 869 (2010) (finding that, at most, the largest proxy advisor’s recommendation shifts 10% of shareholder votes). Even where lobbyists engage with the ample academic evidence on this question, they do so in a way that strains credulity. See Chamber, supra note 6, at 8 (citing a study on say-on-pay votes suggesting that proxy advisors, in that narrow area, can influence a significant proportion of the vote, and concluding that this makes “ISS and Glass Lewis . . . the de facto standard setters for corporate governance policies in the U.S.”).

[8]See Choi, Fisch and Kahan, supra note 7, at 888 (concluding that “all proxy advisors, but particularly ISS, base their recommendations largely on factors that shareholders [already] take into account (independent of the recommendation) in casting their vote. Once these factors are controlled for, overall voting outcomes are substantially similar whether or not a proxy advisor has issued a recommendation. Our evidence demonstrates that the reported influence of ISS is substantially overstated.”).